Law Of Diminishing Returns: Warren Buffett’s Advised Experiment

Law of Diminishing Returns: Warren Buffett Experiment

Warren Buffet had given the following example as a law of diminishing returns and future revenue growth and I decided to take him up on it. “A growth rate of that magnitude can only be maintained by a very small percentage of large businesses. Here’s a test: Examine the record of, say, the 200 highest earning companies from 1970 or 1980 and tabulate how many have increased per-share earnings by 15% annually since those dates. You will find that only a handful have. I would wager you a very significant sum that fewer than 10 of the 200 most profitable companies in 2000 will attain 15% annual growth in earnings-per-share over the next 20 years.” – Warren Buffett

I used the year 1990 Fortune 500 and the year 2013 Fortune 500 for my criteria. (Yes, I used 23 years instead of 20 but don’t think much difference is made)

Based on a capitalization rate of 15% and 23 years as a time interval, I arrived at a future value factor of 24.891 (1.15^23) and multiplied that by the 200th ranking company’s revenue in 1990, using it as a base for 2013 qualification.

2.172 x 24.891 = 54.063 Billion 2013 Annual Revenue as base for criteria.

I did not have much of a list so I decided to add in companies that had 23-year sales growth over 13%
(36.113 Billion 2013 Sales as the base)


Still only 86 companies made the cut in total.

I manually sorted through the list for companies that were both in the top 200 in 1990 as well as the top 86 in 2013. I found 28 that had over 13% revenue growth for the last twenty-three years or 14% of the 1990 Fortune 200.

Company 2013 Rank 1990 Rank
1 Exxon Mobile 2 3
2 Chevron 3 11
3 Phillips 66 (SpinOff) 4 30
4 Berkshire Hathaway 5 179
5 Apple 6 96
6 General Motors 7 1
7 General Electric 8 5
8 Ford 10 2
9 Hewlett-Packard 15 33
10 IBM 20 4
11 Archer Daniels Midland 27 57
12 Procter & Gamble 28 14
13 Caterpillar 42 38
14 Pepsi 43 23
15 ConocoPhillips 45 30
16 Johnston & Johnston 41 47
17 Pfizer 48 80
18 United Technologies 50 17
19 Dow Chemical 52 20
20 Intel 54 137
21 Coca-Cola 57 121
22 Merck 58 70
23 Lockheed Martin 59 45
24 Johnson Controls 67 126
25 Abbott Labortories 70 90
26 Dupont 72 9
27 Honeywell 78 65
28 Deere 85 66

How many of the 28 companies had over 15% annual E.P.S growth for the last twenty years? Buffett’s wager was that fewer than 10 had done so. I used net income as a proxy for E.P.S.

Lockheed Martin (LMT) had the largest CAGR of the bunch, making the earnings cut with 2 Million 1990 earnings compared to 2.745 Billion in 2013 or 36.29% CAGR over the last 23 years.

Coca-Cola (KO) also makes the cut from 1990 earnings of 71.7 Million to 9.019 Billion or a23.39% CAGR for the last 23 years.

Intel (INTCwas another company with over 15% growth for the last 23 years, growing from 391 Million net income in 1990 to 11 Billion in 2013. Intel managed a 15.614% CAGR for the last 23 years.

ConocoPhillips (COP) went from 1990 net income of 219 Million to 8.428 Billion in 2013 or good for a 17.2% CAGR.

Apple (AAPL) was one of four in the 20%+ club, growing from 454 Million 1990 net income to a phenomenal 41.733 Billion in 2013 or a 21.72% CAGR. 

Berkshire Hathaway (BRK.A) (BRK.B) is really no surprise here considering the CEO and team who are running the place. Berkshire had 1990 net income of 447.5 Million and 2013 net income of 14.824 Billion or a 23-year CAGR of 16.44%.

Chevron (CVX) also had phenomenal growth numbers over the 23-year span, growing from 251 Million to 26.179 Billion or a whopping 22.39% CAGR. 

Looks like Buffett’s bet would have paid off with only 7 companies from the 1990 Fortune 500 growing both revenue at 13%+ and net income at 15%+. It is crazy to think that if one took the Fortune 500 in 1990 (or possible now), with the goal of at least a 15% CAGR from investment, the chances of doing so would only be about 3.5%.

Score one for the small caps?

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